Market structure (Copy)
3.8.1 Competitive Markets
Definition
- A competitive market is one with a large number of firms competing to sell similar goods or services.
- No single firm can control price.
- Firms are usually price takers.
Characteristics of Competitive Markets
- Large number of firms → each has a small market share.
- Freedom of entry and exit → new firms can join easily if profits are high.
- Similar products → goods are almost identical (homogenous).
- Prices determined by demand and supply → no firm can set its own price.
- High consumer choice → many suppliers available.
- Focus on efficiency → firms must keep costs low to survive.
Effects of High Competition
- Price
- Prices remain low because firms cannot overcharge.
- If one firm charges more, consumers switch to rivals.
- Quality
- Firms try to improve quality to attract customers.
- Choice
- Consumers have wide variety of suppliers.
- Profit
- Firms earn normal profit (just enough to stay in business).
- Excess profit attracts new firms, pushing profits down.
Advantages of Competitive Markets
- Lower prices for consumers.
- Greater efficiency by firms.
- Innovation in quality to attract buyers.
- Wide choice for consumers.
Disadvantages of Competitive Markets
- Firms may cut costs too much, harming quality.
- Lack of large profits may reduce research and development (R&D).
- Market may become overcrowded with too many small firms.
Diagram – Competitive Market
Price
│
│---- Market Price (set by demand & supply)
│
│ Firm 1 Firm 2 Firm 3 ... Firm N
│ | | | |
│ | | | |
└───────────────────────────────────── Quantity
- Many firms selling at the same price.
- None has power to change price.
3.8.2 Monopoly Markets
Definition
- A monopoly is a market with one dominant firm (or nearly one).
- The firm is a price maker, able to control supply and price.
Characteristics of a Monopoly
- Single seller dominates the market (e.g., >25% market share in UK law).
- Barriers to entry prevent new firms (legal restrictions, high costs, patents).
- Unique product with no close substitutes.
- Price control → monopoly can set higher prices.
- Abnormal profits sustained in the long run.
Advantages of Monopoly
- Economies of Scale
- Large production allows lower average costs.
- Can lead to cheaper prices if savings are passed to consumers.
- Research and Development (R&D)
- Higher profits may be invested in innovation.
- Stable Supply
- One firm controlling supply ensures stability and continuity.
Disadvantages of Monopoly
- Higher Prices
- Lack of competition allows monopolies to charge more.
- Lower Output
- Production may be restricted to raise prices.
- Poor Quality
- Without rivals, less incentive to maintain high quality.
- Inefficiency
- Firms may not minimise costs (X-inefficiency).
- Consumer Choice
- Consumers have little or no choice.
Diagram – Monopoly Market
Price
│ Monopoly
│ |
│ |â– â– â– â– â– â– â– â–
│ | â– â– â– â– â– â– â– â–
│ | â– â– â– â– â– â– â–
│ |
└────────────────────────────── Quantity
- One dominant firm controls supply.
- Can set higher prices than in competition.
Comparison – Competitive vs Monopoly
| Factor | Competitive Market | Monopoly Market |
|---|---|---|
| Number of Firms | Many small firms | One dominant firm |
| Price | Low, set by market | High, set by monopoly |
| Quality | Must compete to improve | Can be poor (less pressure) |
| Choice | Wide consumer choice | Little or no choice |
| Profit | Normal profit in long run | Abnormal profit sustained |
| Efficiency | High efficiency | Often inefficient |
| Barriers to Entry | Low | Very high |
Summary
- Competitive markets: many firms, low prices, normal profits, efficiency.
- Monopoly markets: one firm, high prices, abnormal profits, less choice.
- Both have pros and cons depending on the situation.